Monday, January 14, 2008

Bad news for the economy, good news for GenDebt

Fascinating story by my college classmate Michael Barbaro in the NYTimes. "The country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year".

Of course a downturn in spending on stuff like video games and designer bags is bad news for our consumer-oriented economy. But it's good news for individuals, if it means they are being more realistic about tradeoffs and living within their means. Interestingly, the authors choose to quote a 22 year old to that effect, maybe because of their reputation for profligacy.

"Jinal Shah, 22, a college senior in New York, said she wanted to buy the popular Nintendo Wii video game system as a gift for herself this holiday season, but had second thoughts because of the $250 price tag. She ended up not purchasing it.

“You have to make choices,” she said. “I get the Wii, or I go out more. I am just much more aware of the tradeoff now.”

2 comments:

The quoted mentioned the trade-off between the PRODUCT or GOING OUT MORE. Each one leads to little growth in savings (or debt re-payment), likely, and a growth in some companies earnings, i.e - Budweiser, Phillip Morris, Outback Steakhouse? I see though that there is a final acknowledgment of a trade off, whatever it may be. Perhaps a start.

Generally I would agree that we will see a more frugal generation, but only after the youngest of them start to ween themselves off the parent income. IF you've got extra, why not spend it on gaming - that trend will probably continue.

Sorry, but regardless of what the media might say a decline in personal consumption is not necessarily a precursor to a recession or to any sort of nasty economic malaise. Take it from someone who has lived through the '81-'82 recession and the others since.

The NY times writer needs to understand a couple of things, the first of which is a short-term squeeze on personal consumption due to (short-to-intermediate term) elevated energy prices is not going to kill the consumer economy. Secondly, the actions of a few (i.e. sub-prime et al) won't spoil the party. In fact, one could say the "party" died off at the end of 2002 and hasn't really gotten started again (yet), exceptions being those folks celebrating their (previous) good fortune as homeowners. Our financial system will take care of this issue in short order.

As a contrarian Baby Boomer who has always leaned against the tide rather than gone with the flow, let me humbly advise that the path to financial success is certainly paved with sacrifice but is also there for the taking if you consume less than you make and do other common sensical things such as avoid new cars, especially SUVs.